A report on Dishonor of

Cheque
Contract Law
ICFAI University
49 pag.

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 A REPORT
ON
DISHONOR OF CHEQUE

BY
TUSHAR BARIK

TABLE OF CONTENTS

1. Table of Cases & Statutes

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2. Research Methodology

3. Introduction

4. Dishonour of Cheques – Meaning

5. Dishonour of Cheque - Interpretation of Section 138

6. Dishonour of Cheque – Offence By Drawer

7. Proceedings against Dishonour of Cheque

8. Offences - Cheating and Forgery

9. Liability for Stopped Payment

10. Drawer’s Liability for Dishonour of Cheque

11. Drawee’s Liability for Dishonour of Cheque

12. Dishonour of Cheque - Liability of a Company

13. Conclusion

14. Bibliography

TABLE OF CASES AND STATUTES

Table of Cases

1. Om Prakash Maniyar v. Swati Bhide [1992 Mah LJ 302 at 304]

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 2. Medical Chemicals & Pharma P Ltd v. Biological E Ltd

3. Pankajbhai Nagjibhai Patel v. State

4. Keshavji Madhavji v. Emperor [AIR 1930 Bom 179]

5. Baijnath Sahay v. Emperor [AIR 1933 Pat 183]

6. Abdul Samod v. Satya Narayan Mahavir

7. Mrs. R. Jayalaxmi v. Mrs. Rashida

8. Mrs. Rama Gupta v. Bakesman’s Home Product Limited Patiala

9. Calcutta Sanitary Wares v. C. T. Jacob

10. M. M. Malik v. Prem Kumar Goyal

11. Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar

12. M/s. Electronics Trade & Technology Development Corpn. Ltd.,

Secunderabad v. M/s. Indian Technologists & Engineers (Electronics)
Pvt. Ltd. and another

13. New Central Hall v United Commercial Bank Ltd.

14. Jogendra Nath Chakrawarti v. New Bengal Bank Limited [AIR 1939
Cal. 63]

INTRODUCTION

Advent of cheques in the market have given a new dimension to the

commercial and corporate world, its time when people have preferred to
carry and execute a small piece of paper called cheque than carrying the

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currency worth the value of cheque. Dealings in cheques are vital and
important not only for banking purposes but also for the commerce and
industry and the economy of the country. But pursuant to the rise in dealings
with cheques, the practice of giving cheques without any intention of
honoring them has also risen. In case a cheque is issued by a person in
liquidation of his debt or liability, and same is dishonoured, then it not only
creates a bad taste, but can also result in harassment and can cause damages
to the person to whom the cheque may have been issued.

Since business activities have increased, the attempt to commit crimes and
indulge in activities for making easy money have also increased. Thus
besides civil law, an important development both in internal and external
trade is the growth of crimes and it has been found that the banking
transactions and banking business is every day being confronted with
criminal actions and this has led to an increase in the number of criminal
cases relating to or concerned with the banking transactions.

In India, cheques are governed by the Negotiable Instruments Act, 1881,

which is largely a codification of the English Law on the subject. Before
1988 there was no effective legal provision to restrain people from issuing
cheques without having sufficient funds in their account or any stringent
provision to punish them in the event of such cheque not being honoured by
their bankers and returned unpaid. Although, on dishonour of cheques there
is a civil liability accrued, however in reality the processes to seek civil
justice becomes notoriously dilatory and recover by way of a civil suit takes
an inordinately long time. To ensure prompt remedy against defaulters and to
ensure credibility of the holders of the negotiable instrument a criminal
remedy of penalty was inserted in Negotiable Instruments Act, 1881 in form
of the Banking, Public Financial Institutions and Negotiable Instruments

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Laws (Amendment) Act, 1988 which were further modified by the
Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002[3].

Of the ten sections comprising chapter XVII of the Act, section 138 creates
statutory offence in the matter of dishonour of cheques on the ground of
insufficiency of funds in the account maintained by a person with the banker.
Section 138 of the Negotiable Instruments Act, 1881 is a penal provision
wherein if a person draws a cheque on an account maintained by him with a
banker for payment of any amount of money to another person from out of
that account for the discharge, in whole or in part of any debt or other
liability, is returned by the bank unpaid, on the ground either because of the
amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from
that account by an agreement made with that bank, such person shall be
deemed to have committed an offence.

Section 138 of the Act can be said to be falling in the acts which are not
criminal in real sense, but are acts which in public interest are prohibited
under the penalty or those where although the proceeding may be in criminal
form, they are in reality only a summary mode of enforcing a civil right.
Normally in criminal law existence of guilty intent is an essential ingredient
of a crime. However the Legislature can always create an offence of absolute
liability or strict liability where ‘mens rea’ is not at all necessary.

This paper deals with the various aspects of dishonour of cheques and then,
proceeds towards the liability arising out of such dishonour.

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 DISHONOUR OF CHEQUES – MEANING

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as

"a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand".

"Dishonour" means "to refuse or neglect to accept or pay when duly

presented for payment of a bill of exchange or a promissory note or draft on
a banker.1

Black’s Law Dictionary2 defines the term "Dishonour" as

"to refuse to accept or pay a draft or to pay a promissory note when duly
presented. An instrument is dishonored when a necessary or optional
presentment is duly made and due acceptance or payment is refused, or
cannot be obtained within the prescribed time, or in case of bank collections,
the instrument is reasonably returned by the midnight deadline;

Reference to the term 'dishonour' has been made in Section 91 and Section
92 of the Negotiable Instruments Act, 1881.

Section 91 - Dishonor by non- acceptance

"A bill of exchange is said to be dishonored by non-acceptance when the

drawee, or one of several drawee not being partners, makes default in
acceptance upon being duly required to accept the bill, or where presentment
is excused and the bill is not accepted.

1Vide Wharton’s Law Lexicon, 1978 Ed. p. 335

2 Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

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Where the drawee is incompetent to contract, or the acceptance is qualified
the bill may be treated as dishonored".

Section 92- Dishonour by non-payment

"A promissory note, bill of exchange or cheque is said to be dishonored by

non-payment when the maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon being duly required to pay the
same".

Thus if on presentation the banker does not pay, then dishonour takes place
and the holder acquires at once the right of recourse against the drawer and
the other parties on the cheque.

Dishonour of cheque has been considered as a criminal offence under

Section 138 of the Negotiable Instruments Act, 1881. According to Section
138 whenever any cheque for discharge of any legally enforceable debt or
other liability is dishonoured by the bank for want of funds and the payment
is not made by the drawer despite a legal notice of demand, it shall be
deemed to be criminal offence.

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DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138

Section 138 of the Negotiable Instruments Act, 1881

Dishonour of cheques is considered as an offence under Section 138 of the

Negotiable Instruments Act, 1881. Section 138 deals with Dishonour of
cheque for insufficiency of funds in the accounts. The Section reads as
follows:

"Where any cheque drawn by a person on an account maintained by him

with a banker for payment of any amount of money to another person from
out of that account for the discharge, in whole or in part, of any debt or other
liability, is returned by the bank unpaid, either because of the amount of
money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account
by an agreement made with that bank, such person shall be deemed to have
committed an offence and shall without prejudice to any other provisions of
this Act, be punished with imprisonment for a term which may extend to two
year, or with fine which may extend to twice the amount of the cheque, or
with both.

Provided that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the bank within a period of six months
from the date on which it is drawn or within the period of its validity,
whichever is earlier.

(b) The payee or the holder in due course of the cheque, as the case may be,
makes a demand for the payment of the said amount of money by giving a
notice, in writing, to the drawer, of the cheque, within thirty days of the

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receipt of information by him from the bank regarding the return of the
cheques as unpaid, and

(c) The drawer of such cheque fails to make the payment of the said amount
of money to the payee or, as the case may be, to the holder in due course of
the cheque, within fifteen days of the receipt of the said notice".

Object of Section 138

The object of Section 138 is to make drawer of the cheque subject to penalty
when the cheque bounces on the ground of insufficient funds.

The plain reading of Section 138 of the Negotiable Instruments Act makes it
clear that, the words, "either because of the amount of money standing to the
credit of that account is insufficient to honour the cheque or that it exceeds
the amount arranged to be paid from that account…" have been specifically
used. It would, therefore, mean that only two contingencies are contemplated
and as such, the words-"either-or" have been used. It is, therefore, clear that
the cheque should be dishonoured either for the insufficiency of the amount
or, because it exceeds the amount arranged to be paid from that account. No
third contingency or eventuality has been contemplated and the specific
clear wording of Section 138 eliminates any third contingency than
mentioned in the Section itself.

The cheques can be dishonoured for many other reasons and there may be so
many eventualities in which the payee is denied payment by the bank, the
reasons such as mentioning the date incorrectly or some corrections not
initialed or the difference in between the amount mentioned in figures and
words, are certain other contingencies in which the cheques will be
definitely dishonoured and would be returned as unpaid, however it is not in
respect of any of these contingencies that he dishonour of a cheques has

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been made penal under Section 138 of the said Act. In Om Prakash Maniyar
v. Swati Bhide3, the submissions on behalf of the petitioners to the effect that
the dishonour because of the closure of the account should be held as penal,
was not accepted by the court.

Section 138 was introduced with a laudable public policy behind it. It is
intended to prevent or curtail a mischief which is likely to affect financial
transactions, and thereby trade and business and ultimately, economy of the
country.

Exclusion of Mens Rea4

For committing an offence under Section 138 of the Act "mens rea" is not an
essential ingredient5 .

Section 138 of the Negotiable Instruments Act, 1881, excludes mens rea by
creating strict liability and this is explicit from the words 'such person shall
be deemed to have committed an offence'. The returning of the cheque by
the bank either because he amount of money standing to the credit of the
drawer of the cheque is insufficient or the amount covered by the cheque is
in the excess of the amount arranged to be paid from that account by an
agreement with the bank are the two necessary conditions creating strict
liability.

31992 Mah LJ 302 at 304

4
Mens Rea, a guilty mind – Although prima facie and as a general rule there
must be a mind at fault before there can be a crime, it is not an inflexible
rule, and a statute may relate to such subject-matter and may be so framed as
to make an act criminal, whether there has been any intention to break the
law or otherwise to do wrong or not. There is a large body of Municipal law
at the present day which is so conceived – Wills R. v. Tolson, (1889) 23
Q.B.D 173 (vide Wharton’s Law Lexicon 14th Ed., Fifth Imp., 1992).
5 Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases

438 (Bom.)

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Ingredients and requirements of the penal provisions

Section 138 creates an offence for which the mental elements are not
necessary. It is enough if a cheque is drawn by the accused on an account
maintained by him with a banker for payment of any amount of money to
another person from out of that account for discharge in whole or in part, of
any debt or other liability due. Therefore, whenever the cheques are on
account of insufficiency of funds or reasons referable to the drawer’s
liability to provide for funds, the provisions of section 138 of the Act would
be attracted, provided the following conditions are satisfied:

1. Cheque drawn on a bank account

Section 138 requires, that a cheque, to be caught by the section, should be

'drawn by a person on an account maintained by him with the banker for
payment of any amount of money'. Existence of a "live account" at the time
of issue of cheque is a condition precedent for attracting penal liability for
the offence under this section. The cheque is returned by the bank unpaid
either because of the insufficiency of the amount or, because it exceeds the
amount arranged to be paid from that account. The words "that account" in
the section denote to the account in respect of which the cheque was drawn.
No doubt if any person manages to issue a cheque without an account with
the bank concerned its consequences would not snowball into the offence
described under section 138 of the Act. For the offence under section 138 of
the Act there must have been an account maintained by the drawer at the
time of the cheque was drawn.

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Vijya Kumar Gupta v. R.S. Traders, 2005 Cr LJ 3860 (J&K)
Account Closed before cheque reached bank. Amounts to
insufficiency of funds.
Note:- It is felt that if a cheque is post dated and the account is closed due to
some circumstances and the party (payee) is informed well in advance prior
to the date of presentation of the cheque and a willingness is shown to
replace the cheque already issued, from the account now maintained by the
drawer and still the cheque is presented, this situation may not be covered
by Section 138 of the Act. In such cases the drawer of the cheque must
comply with proviso (c) to section 138 of the act as non-compliance with
proviso (c) of section 138 gives rise to cause of action and not mere
dishonoring of cheque.
2. Issue of Cheque in discharge of a debt or liability

The cheque unpaid by the bank must have been issued in discharge of a debt
or other liability wholly or in part. Where a cheque is issued not for the
purposes of discharge of any debt or other liability, the maker of the cheque
is not liable for prosecution under section 138 of the Act. A cheque given as
a gift or for any other reasons and not for the satisfaction of any debt or
other liability, partly or wholly, even if it is returned unpaid will not meet the
penal consequences.

If the above conditions are fulfilled, irrespective of the mental conditions of

the drawer he shall be deemed to have committed an offence, provided the
other four requisites are fulfilled:

a) Presentation of the cheque within six months or within the period of

its validity

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The cheque must have been presented to the bank within a period of six
months from the date on which it is drawn or its period of validity,
whichever is earlier. Thus if a cheque is valid for three months and is
presented to the bank within a period of six months the provisions of this
section shall not be attracted. However if the period of validity of the cheque
is not specified or prescribed the cheque is presented within six months from
the date the cause of action can arise. The six months are taken from the date
the cheque was drawn.

b) Return of the cheque unpaid for reason of insufficiency of funds

The cheque must be returned either because the money standing to the credit
of that account is insufficient to honour the cheque or that it exceeds the
arrangement made to be paid from that account by an agreement with the
bank.

c) Issue of the notice of dishonour demanding payment within thirty

days of receipt of information as to dishonour of the cheque.

The payee or the holder in due course of the cheque has to give a notice in
writing making a demand for payment of the said amount of money to the
drawer of the cheque. Such notice must be given within 30 days of
information from the bank regarding the return of cheque as unpaid.

d) Failure of the drawer to make the payment within fifteen days of the
receipt of the payment

After the receipt of the above notice the drawer of the cheque has to make
payment of said amount of money to the payee or to the holder in due course
of the cheque within 15 days of the receipt of the notice. If the payment is

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not made after the receipt of the notice within stipulated time, a cause of
action for initiating criminal proceedings under this section will arise.

Scope and applicability of Section 138

According to the Section 138 whenever any cheque for discharge of any
legally enforceable debt or other liability is dishonoured by the bank for
want of funds and the payment is not made by the drawer despite a legal
notice of demand, it shall be deemed to be a criminal offence.

Where a cheque is issued not for the purpose of discharge of any debt or
other liability, the maker of the cheque is not liable for prosecution. For
example, if the cheque is given by way of a gift or present and if it is
dishonoured by the bank, the maker of the cheque is not liable for
prosecution6.

6 Mohan Krishna (B) v Union of India 1996 Cri LJ 636 (AP)

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 DISHONOUR OF CHEQUE – OFFENCE BY DRAWER

The word 'offence' is not defined in the Negotiable Instruments Act, 1881.
According to section 3(38) of the General Clauses Act it means any act or
omission made punishable by any law for the time being in force.

As noticed in the previous topic, what is made an offence is not the drawing
of cheque alone. It must have been drawn in discharge, in whole or in part,
of a legally enforceable debt or other liability. It must have been duly
presented in time and dishonoured. There must be a written demand for the
amount within a specified time, followed by failure to make payment within
another specified time. It becomes an offence only on such failure which is
an illegal omission7 .

It is the person who draws and issues a cheque that falls within the ambit of
Section 138 of the Negotiable Instruments Act, 1881. The maker of cheque
(who signs the cheque) is called the `drawer'.

When a person is aware of the fact that there are no funds in one's bank
account if he issues cheque to a trader for goods purchased, the bank will
return the cheque for insufficiency of funds. By issuing a cheque under such
circumstance, drawer commits an offence under Section 138 of the
Negotiable Instruments Act.

On the cheque being dishonoured, the payee in terms of Section 138 of the
Act can call upon the guilty to pay the money covered by the returned
cheque within 30 days from the date of return, only after serving a notice of
dishonour to the drawer. If the drawer does not pay the amount despite the
notice within 15 days from the receipt thereof, the drawer commits an
offence under Section 138 of the Negotiable Instruments Act, 1881.

7 Anto (K S) v Union of India (1993) 76 Comp Cas 105 (Ker).

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Notice of Dishonour

Notice of Dishonour is a formal communication of the fact of dishonour of

cheque. Sub-section (b) of Section 138 of the Negotiable Instruments Act
requires the payee or the holder in due course to issue a notice in writing to
the drawer of the cheque within 15 days of the receipt of the information by
him from the bank regarding the return of the cheque as unpaid. The sub-
section further provides that the drawer has to comply with the demand
within 15 days of the receipt of the said notice.

The demand notice envisaged in section 138 is in effect a notice of

dishonour to the drawer combined with a demand on him to pay the amount
of the dishonoured cheque within the time allowed by the statute. It serves as
a warning to the person to whom the notice is given that he could now be
made liable. If the holder fails to give this notice to the drawer, except in
cases when notice of dishonour may be excused, all prior parties liable
thereon are discharged of their liability.

Cause of Action

Cause of action for prosecution under section 138 of the Negotiable

Instruments Act does not arise by mere presentation of the cheque in bank
and by its dishonour.

A division bench of the Kerala High Court8, after considering the ambit and
scope of Sections 138 and 142 of the Negotiable Instruments Act, has held
that the prosecution for such an offence would only be maintainable when
the period of 15 days from the receipt of the notice by the drawer of the
cheque has elapsed. The court observed that the dishonour of he cheque by
itself does not give rise to a cause of action because payment can be made on

8 N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797

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receipt of the notice of demand contemplated in clause (b) of Section 138
and in that event, there is no offence, nor any attempt to commit the offence
nor even a preparation to commit the offence. Failure to pay the amount
within fifteen days of receipt of notice alone is the cause of action that
would permit a prosecution and nothing else.

Written Complaint

A complaint is required to be filed by the payee or the holder in due course

of the dishonoured cheque.

Section 142 (a) of the Negotiable Instruments Act, makes it clear that only
upon a complaint in writing made by the payee or the holder in due course of
the cheque, the court can take cognizance of the offence. If the payee or the
holder in due course does not file a complaint, the drawer cannot be
prosecuted.

Cognizance of Offence

In terms of Section 142 of the Negotiable Instruments Act, 1881, no court

shall take cognizance of any offence punishable under section 138 except
upon a written complaint made by the payee or the holder in due course of
the dishonoured cheque and filed within one month of the date on which the
cause of action arose. No court inferior to that of a metropolitan magistrate
or a first-class judicial magistrate can try an offence under section 138.

Section 142 states that the cognizance of an offence can be taken under
Section 138 upon a complaint in writing which must be made within one
month by the payee or holder in due course from the date on which the cause
of action arises under clause (c) of the proviso to section 1389 . In substance

9 Kody Elecot Ltd v. Down Town Hospital

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we can say that when a drawer, served with a notice within 30 days from the
date on which the payee or the holder in due course has come to know about
the return of the cheque and the drawer does not make the payment as
demanded, the complaint shall have to be filed within 30 days from the date
on which the 15 days time expires.

The Negotiable Instruments (Amendment and Miscellaneous Provisions)

Act, 2002 has introduced a proviso to Section 142 permitting the court to
take cognizance of a complaint after the prescribed period if the complainant
satisfies the court that he had sufficient cause for not making a complaint
within such period. It would thus be within the discretion of the court to
condone the delay, depending upon the causative circumstances.

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 PROCEEDINGS AGAINST DISHONOUR OF CHEQUE

Prior to the incorporation of chapter XVII in the Negotiable Instruments Act

in 1988, to deter and penalize the issue of worthless cheques, it was only
under the provisions of the Indian penal Code 1860 (IPC) that the drawer of
a cheque could be criminally prosecuted if it could be shown that he cheated
someone by issuing the cheque. Even after the introduction of the specific
provisions in the Negotiable Instruments Act, a drawer can be prosecuted
under IPC for cheating, but he cannot be prosecuted and punished for the
same offence under both the enactments. Mens rea or dishonest intention
must be established to prove cheating, but it is not an essential element of an
offence under section 138 of the Negotiable Instruments Act.

Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act

Chapter XVII inserted by the Banking, Public Financial Institutions and

Negotiable Instruments Laws (Amendment) Act, 1988 provides for penalties
in case of dishonour of certain cheques for insufficiency of funds in the
accounts or for the reason that the amount exceeds the arrangement made by
the drawer.

As per the penal provisions under the Act, the drawer, committing an offence
under Section 138, is liable to be punished with imprisonment for a term
which may extend to two years, or fine which may extend to twice the
amount of the cheque or both.

Summary Proceeding - Order 37 of the Code of Civil Procedure

When a cheque is dishonoured, the holder or payee of the cheque can sue the
drawer or endorser for the recovery of amount alongwith interest. Besides a
civil suit for recovery of the amount, proceeding in a summary manner can

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be initiated under Order 37 of the Code of Civil Procedure. The advantage of
suing under chapter XXXVII of Civil Procedure Code is that the defendant
is not allowed in such cases to defend the suit without leave obtained from
Court and it is provided further that a decree passed under the said Order,
may be executed forthwith. If no such leave is applied for or granted ,the
allegations in the plaint shall be deemed to be admitted, and the plaintiff is
entitled to a decree for the principal sum and also the interest as calculated
under Section 9 and 80 of the Negotiable Instruments Act, 1881.

Criminal prosecution under section 138 does not bar a civil action against
the drawer on the dishonoured cheque. In Medical Chemicals & Pharma P
Ltd v. Biological E Ltd., the Supreme Court said:

"Both criminal law and civil law remedy can be pursued in diverse
situations. As a matter of fact, "they are not mutually exclusive but clearly
co-extensive and essentially differ in their content and consequence".

In addition to the remedies available under the Act the payee can also resort
to remedies available under Civil Procedure Code and Consumer Protection
Act. In Pankajbhai Nagjibhai Patel v. State, it has been held that in view of
the limit of fine as prescribed in Section 29(2), Code of Criminal Procedure,
the Magistrate who thinks it fit that the complainant must be compensated
for loss can resort to section 357(3) of the code and can award compensation
to the complainant for which no limit is prescribed in Section 357(3). The
power of Courts to award compensation is not ancillary to other sentences
but it is in addition thereto.

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 OFFENCES - CHEATING AND FORGERY

Cheating being an offence is defined under Section 415 of the Indian Penal
Code as follows:

"Whoever, by deceiving any person, fraudulently or dishonestly induces the

person so deceived to deliver any property to any person, or to consent that
any person shall retain any property, or intentionally induces the person so
deceived to do or omit to do anything which he would not do omit if he were
not so deceived, and which act or omission causes or is likely to cause
damage or harm to that person in body, mind, reputation or property, is said
to "cheat".

Explanation. A dishonest concealment of facts is deception within the

meaning of this section."

In order to bring the case within the definition of Cheating under section 415
of the IPC, it has to be shown by the prosecution that there was some
inducement on the part of the accused persons and the said inducement was
made fraudulently or dishonestly with a view to deceive the complainant. It
is further to be shown by the prosecution that due to deception practiced by
the accused persons, the person so deceived had delivered the property to the
accused persons or had given consent that the accused person shall retain
that property.

To hold a person guilty of the offence of cheating it has to be shown that his
intention was dishonest at the time of making the promise.

Whenever a cheque issued with dishonest intentions is dishonoured, the

drawer of the cheque can be proceeded against under sections 417 & 420 of
the IPC by the payee or holder in due course of the cheque.

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In Keshavji Madhavji v. Emperor [AIR 1930 Bom 179] it was observed that
‘it was for the prosecution to establish facts which point prima facie to the
conclusion that the failure to meet the cheque was not accidental but a
consequence expected and therefore, intended by the accused. It will then be
for the accused to establish any facts that may be in his favour which are
specially within his knowledge and as to which the prosecution could not be
expected to have any information’. A mere allegation that a cheque issued by
the accused to the complainant had been dishonoured is not sufficient to
establish the offence of cheating under section 415 of the IPC.

In Baijnath Sahay v. Emperor [AIR 1933 Pat 183] it was observed that the
act of drawing a cheque implied at least three elements: (a) that the drawer
has an account with the bank in question; (b) that he has authority to draw on
it for the amount shown on the cheque; (c) that the cheque as drawn, is valid
order for the payment of the amount, or that the present state of affairs is
such that in the ordinary course of events, the cheque will on future
presentment be dishonoured. Drawing of a cheque does not imply a
representation that the drawer already had the money in the bank to the
amount shown on the cheque, for he may either have authority to overdraw,
or have an honest intention of paying in the necessary money for before
cheque can be presented.

Thus mere dishonour for lack of funds does not amount to cheating; for
cheating to be established a mental element to deceive is necessary.

Cheating by Personation

Section 416 of IPC defines cheating by personation as follows:

"A person is said to cheat by personation if he cheats by pretending to be

some other person, or by knowingly substituting one person for another, or

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representing that he or any other person is a person other than he or such
other person really is.

Explanation. -The offence is committed whether the individual personated is

a real or imaginary person."

The personation referred to in this section may be either by words or by

conduct. The offence under section 416 of IPC owes its gravity to the fact
that it affects not only the person deceived but also the person personated.

Offence of cheating by personation is punishable under section 419 of IPC

whereas general cheating is punishable under section 417 and section 417 of
IPC.

Forgery

Section 463 of IPC defines forgery as:

"Whoever makes any false documents or electronic record part of a

document or electronic record with, intent to cause damage or injury, to the
public or to any person, or to support any claim or title, or to cause any
person to part with property, or to enter into any express or implied contract,
or with intent to commit fraud or that fraud may be committed, commits
forgery."

Section 464 of IPC deals with making a false document and provides as
under:

A person is said to make a false document or false electronic record-

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Firstly -Who dishonestly or fraudulently makes, signs, seals or executes a
document or part of a document or makes or transmits any electronic record
or part of any electronic record, affixes any digital signature on any
electronic record, or makes any mark denoting the execution of a document
or the authenticity of the digital signature, with the intention of causing it to
be believed that such document or part of document, electronic record or
digital signature was made, signed, sealed, executed, transmitted or affixed
by or by the authority of a person by whom or by whose authority he knows
that it was not made, signed, sealed, executed or affixed; or

Secondly- Who, without lawful authority, dishonestly or fraudulently, by

cancellation or otherwise, alters a document or an electronic record in any
material part thereof, after it has been made, executed or affixed with digital
signature either by himself or by any other person, whether such person be
living or dead at the time of such alteration; or

Thirdly- Who dishonestly or fraudulently causes any person to sign, seal,

execute or alter a document or an electronic record or to affix his digital
signature on any electronic record knowing that such person by reason of
unsoundness of mind or intoxication cannot, or that by reason of deception
practised upon him, he does not know the contents of the document or
electronic record or the nature of the alterations.

Explanation 1 – A man’s signature of his own name may amount to forgery.

Explanation 1 – The making of a false document in the name of a fictitious

person, intending it to be believed that he document was made by a real
person, or in the name of a deceased person, intending it to be believed that
the document was made by the person in his lifetime, may amount t forgery.

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Punishment for Forgery

Whoever commits forgery shall be punished with the imprisonment of either

for a term which may extend to two years or with fie or with both.10

Banker’s liability for payment made on forged cheques

Relationship between a banker and his customer is that of a debtor and

creditor. When a cheque with a forged signature is presented, the banker has
no authority to make payments on it, and if he does make such payment he
would be acting contrary to the law and would be liable to the customer for
the said amount. A bank in such cases can escape liability only if it can show
that the customer is not entitled to make a claim on account of adoption,
estoppel or ratification.

The rule of law in this regard can be stated as follows:

When a cheque duly signed by a customer is presented before a bank with

whom he has an account there is a mandate on the bank to pay the amount
covered by the cheque. However, if the signature on the cheque is not
genuine, there is no mandate on the bank to pay. The bank when makes
payment on such a cheque, cannot resist the claims of the customer with the
defence of negligence on its part, such as leaving the cheque book carelessly
so that the third parties could easily get hold of it. This is because a
document in cheque form, on which the customers name as drawer is forged,
is a mere nullity. The bank can succeed only when it establishes adoption or
estoppel.

10 Section 465 of Indian Penal Code

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 LIABILITY FOR STOPPED PAYMENT

A stopped payment is usually requested if the cheque has been declared

missing or lost. But many a times the drawer, to escape his debt or liability
has used it as an instrument of deception. The 1988 amendment in Section
138 of Negotiable Instruments Act is also silent about Stopped Payment.

As discussed earlier, the contract between the customer and the bank is
defined as a debtor- creditor relationship. This contract requires the bank to
honor all valid and proper orders of the customer to pay amounts from his
account with the bank, for as long as funds remain available in the
customer's account. The customer's order, however, remains executory and
can be rescinded until the bank makes payment. One of the reasons on
account of which the banker can refuse to make the payment of a cheque is
that the payment has been stopped by the drawer. Upon receipt of a timely
stop payment order, the bank ceases to have authority to pay the item.

A customer thus, has a right to give notice to his Bankers to stop payment of
a cheque which he has issued. Generally a written notice, signed by the
drawer is sufficient to stop the payment. A stopped payment is usually
requested if the cheque has been declared missing or lost.

In India, while there is as such no express provision relating to stop payment

of cheques. However there are various judgments regarding this aspect.
Indian Courts have covered this facet in Section 138 of Negotiable
Instruments Act, which is related to dishonour of cheques. The discussion
relating to stop payment has assumed importance in view of the amendment
to the Negotiable Instruments law by the amendment in 1988. Prior to this
amendment, people issued cheques knowing well that the cheque is not
going to be honored on presentation, and they tried to create circumstances

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in which the bank would return the cheque with such endorsements as
"stopped payment", "refer to drawer" or "A/C closed". These were some of
the tricks used by the drawer to escape the penal liability, which was
attached to Section 138 of Negotiable Instruments Act.

The question that arises is whether a drawer who stops the payment having
insufficient funds in his account can be held liable under Section 138 of the
Negotiable Instruments Act? In this regard various judgments of High
Courts and the Supreme Court have been reviewed in order to find out a
solution to the abovementioned issue.

Views taken by various High Courts

In Abdul Samod v. Satya Narayan Mahavir High Court of Punjab and

Haryana thoroughly analyzed section 138 of the Act. Hon’ble Mr. Justice
A.P. Chowdhury stated that there are five ingredients, which must be
fulfilled.

These are as follows:

1. The cheque is drawn on a bank for the discharge of a legally

enforceable debt or other liability.

2. The cheque has returned by the bank unpaid.

3. The cheque is returned unpaid because the amount available in that

account is insufficient for making the payment of the cheques.

4. The payee gives a notice to the drawer claiming the amount within 15
days of the receipt of the information by the Bank and

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 5. The drawer fails to make payment within 15 days of the receipt of
notice.

In this case the respondent filed a complaint with the allegations that the
accused had, inter alia, issued a cheque dated June 9, 1989, for Rs. 22,000
in connection with an amount which had become due on account of purchase
of some raw material by him. The cheque was returned unpaid by the bank
with the remarks "Payment stopped by the drawer". The complainant sent
the requisite notice, but the accused failed to make the payment.

It was stated by the Hon’ble Justice B.M. Thulasidas that:

"The allegations in the complaints, in my view, do make out a prima facie

case against the petitioners. Before filing the complaints, the respondent had
taken care to abide by the relevant legal provisions. Indeed, it is not the case
of the petitioners that no amount is due to the respondent. The issuance of
cheques and their dishonour, followed by notices of demand and failure to
pay are not matters which had been challenged. That the payment was
countermanded by a stop memo is of no consequence. That hardly affects the
right of the respondent to initiate proceedings under the Act. It has the same
effect as closing the account as far as he is concerned. The object of the
provision cannot be allowed to be defeated by such ingenuous action".

Similarly, in Mrs. R. Jayalaxmi v. Mrs. Rashida and as per the Punjab and
Haryana Court in Mrs. Rama Gupta v. Bakesman’s Home Product Limited
Patiala, it has been held that if a cheque was returned with an endorsement
“refer to drawer” and "payment counter-manded by the drawer" then it was
not an offence.

Thus relying on this it was held that when the respondent stopped the
payment of the cheques in question, there was no question of facts

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constituting an offence punishable under section 138 of the Negotiable
Instruments Act.

However, it is significant to note, what is relevant for the purpose of

determining an offence under section 138 of the Negotiable Instruments Act
is whether the drawer of the cheque had arranged for payment or had made
the payment of the amount covered by the cheque within the period of 15
days prescribed under said section and not the reason for which cheques
were dishonored by the Bank.

The above laid proposition has been supported by various High Courts.
Kerala High Court in the case of Calcutta Sanitary Wares v. C. T. Jacob,
where the court was considering a situation whereby the cheque was initially
dishonoured on the basis of a stop-payment memo. The court held that "the
object of the provision cannot be allowed to be defeated by such ingenious
action". The court took the view that dishonour pre-supposes non-payment
as the funds in question were not forthcoming and that in these
circumstances also, the failure to pay the amount within 15 days of the
notice of demand would still constitute an offence as any other view would
defeat the specific provisions of section 138.

The Punjab and Haryana High Court in the case of M. M. Malik v. Prem
Kumar Goyal, analysed the aforesaid sections and held that the cause of
action will be complete when the drawer of the cheque fails to make
payment within 15 days of the receipt of the notice contemplated by proviso
(b) and that the offence shall be deemed to have been committed only from
the date when the notice period expires. The court had construed the
endorsement "refer to drawer" as the bankers inability to honour the cheque
for want of funds in the account of the drawer and further held that as far as
the jurisdiction was concerned, the principle that the ‘debtor has to find the

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creditor” would apply and that the court within whose jurisdiction the
creditor is located will have jurisdiction to entertain the complaint.

In the Division Bench decision of Bombay High Court in Rakesh Menkumar

Porwal v. Narayan Dhondu Joglekar, one of the issues was regarding the
correct manner in which the time-frame as is prescribed in sections 138 and
142 of the Negotiable Instruments Act should be computed. The Hon’ble
Court held that

"A clear reading of section 138.....If, for instance, the closure of an account
or the stoppage of payment or any other of the commonplace reasons for
dishonour were to be justifiable, then, the Legislature would have set these
out in the section as exceptions not constituting an offence. No such
intention can be read into section 138, as none exists. The solitary exception
made by the Legislature is with regard to the drawer being offered a final
opportunity of paying up the amount within 15 days from the receipt of
notice which, in other-words, provides a last opportunity to prove one's bona
fides. It is obvious, that having regard to the widespread practice of issuing
cheques which are dishonoured and the many ingenious methods of avoiding
payment that are practiced, the Legislature has opted for a non-nonsense
situation. The possibility has not been overlooked whereby an account any
inadvertently be overdrawn or a dishonour may be for technical reasons or
where a genuine mistake has occurred and the grace period provided for by
the Legislature after service of notice on the drawer is in order to afford an
opportunity to the drawer to rectify these. Undoubtedly, even when the
dishonour has taken place due to the dishonesty of the depositor, the drawer
is still given a last chance to act otherwise. Consequently, the reasons for
dishonour even if they be very valid as was sought to be pointed out in this

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case, should not and cannot be taken into account by a Magistrate when such
a complaint is presented"

The above mentioned case-laws supports the preposition that while holding
any drawer liable under Section 138, the Court should first see that whether
payment was made to the within 15 days of notice or not. The reason for
dishonour is immaterial because if the drawer is bonafide then he may make
the payment of the amount due under the cheque within the grace period i.e
15 days.

Views of the Supreme Court

Hon’ble Supreme Court has narrated four key Judgments where the drawer
was held liable for Stop payment of cheques. However there is only one
judgment which deals with the above laid preposition.

In M/s. Electronics Trade & Technology Development Corpn. Ltd.,

Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt.
Ltd. and another, a cheque was presented by the complainant on 28-1-1990,
through their bankers M/s. Hyderabad Bank for realisation, with the promise
by the accused, that the same will be honoured when presented. However,
the said cheque was dishonoured with the banker's endorsement dated
29-11-1990 which stated "(i) refer to drawer, (ii) instructions for stopping
payment and (iii) stamped exceeds arrangements." Appellant filed
complaints under Section 138 of the Negotiable Instruments Act, 1881 for
dishonour of cheque for insufficiency of funds in the accounts of the
accused. It was held by the Hon’ble Supreme Court that:

“It would thus be clear that when a cheque is drawn by a person on an

account maintained by him with the banker for payment of any amount of
money to another person out of the amount for the discharge of the debt in

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whole or in part or other liability is returned by the bank with the
endorsement like (1) in this case, "I refer to the drawer" (2) "instructions for
stoppage of payment" and (3) "stamp exceeds arrangement", it amounts to
dishonour within the meaning of Section 138 of the Act. On issuance of the
notice by the payee or the holder in due course after dishonour, to the drawer
demanding payment within 15 days from the date of the receipt of such a
notice, if he does not pay the same, the statutory presumption of dishonest
intention, subject to any other liability, stands satisfied".

The position of Law in this regard has changed dramatically from the 1990’s
till date, due to the amendment that has been brought into the section. A
close look on the judgments of various High Courts shows that the Courts
relied on the presumption that the offence referred to in Section 138 can be
made out only on bouncing of a cheque on the ground of inadequate balance
in the account concerned. Where the cheque is returned unpaid on other
grounds, the same has not been made an offence or where the payment was
counter-manded then it was without an offence. Courts during that time
seemed to be more in favour of the drawer. However, after the recent
judgments of the Supreme Court, the burden has now shifted to the drawer
and a presumption has to be drawn in favour of the holder of the cheque.

As explained earlier, a plain reading of section 138 of the Negotiable

Instruments Act makes it clear that the words "either because of the amount
standing to the credit of that account is sufficient or that it exceeds the
amount ..." have been specifically used. It would, therefore, mean that only
two contingencies are contemplated and as such, the words "... either .... or"
have been used. It is, therefore, clear that the cheque should be dishonoured
either for the insufficiency of the amount or, because it exceeds the amount
arranged to be paid from that account. No third contingency or eventuality

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has been contemplated and the specific clear wording of section 138
eliminates any third contingency other than what is mentioned in the section
itself. It need not be stated that a cheque can be dishonoured for so many
reasons and there may be so many eventualities in which the payee is denied
payment by the bank. For example, mentioning the date incorrectly or some
corrections not initialled or the difference in between the amount mentioned
in figures and words are certain other contingencies in which the cheque will
be certainly dishonoured and would be returned as unpaid. It is not in respect
of any of these contingencies that the dishonour of a cheque has been made
penal under section 138 of the said Act.

Section 138 of the Negotiable Instruments Act is a penal provision wherein

if a person draws a cheque on an account maintained by him with a banker
for payment of any amount of money to another person from out of that
account for the discharge, in whole or in part of any debt or other liability, is
returned by the bank unpaid, on the ground either because of the amount of
money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account
by an agreement made with that bank, such person shall be deemed to have
committed an offence. However with regard to "Payment stopped by the
drawer" this section does not mention anything specifically.

Whatever may be ground or reason on the basis of which the cheque is

dishonoured by a bank, whether it may "stopped payment by drawer" or
"signature differ" or any other ground, an offence under the section is made
out and the drawee has full right to initiate proceedings u/s 482 CrPC. It is
also important that the time restriction given in Section 138 (c) also get

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attracted in case of stop payment when a notice as required by the provision
is sent to the drawer.

It is seen that there are manifold reasons for the dishonor of cheques by
banks but there is statutory mandate upon the payee under Section 13 (b) of
Negotiable Instruments Act for giving a notice demanding the payment of
the amount of said cheque, within 15 days from the date of the information
as to bouncing of the said cheque from the drawer of the cheque and upon
failure to make payment of the amount by the drawer within 15 days,
offence under section 138 is deemed to have been committed. Moreover the
decision of the Supreme Court in Electronics Trade & Technology
Development Corporation Ltd is explicit and has decided all sorts of
controversies in relation to bouncing of the cheque due to payment stopped
by the drawer. It has expressly held that if on issuance of the notice by the
payee or the holder in due course after dishonour, to the drawer demanding
payment within 15 days from the date of the receipt of such a notice, if he
does not pay the same, the statutory presumption of dishonest intention,
subject to any other liability, stands satisfied.

It can be concluded that whatever may be the ground or reason on the basis
of which the cheque is dishonoured by a bank, whether it may "stopped
payment by drawer" or "signature differ" or any other ground the offence
under the section is made out and the drawee has full right to initiate
proceedings and while deciding the case the Court should see that whether
payment has been made by the drawer within 15 days of notice issued by the
drawee after the dishonour of cheque.

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 DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE

Section 30 of the Negotiable Instruments Act, 1881 reads as follows:

"the drawer of a bill of exchange or a cheque is bound, in case of dishonour

by the drawee or acceptor thereof, to compensate the holder, provided due
notice of dishonour has been given to, or received by, the drawer".

Section 30 makes it imperative that the notice of dishonour should of

necessity be served on to the drawer of such cheque. It is clear that the
drawer shall be bound to compensate the payee or the holder, as the case
may be, if only he has been served with the notice of dishonour.

Section 138 of the Negotiable Instruments Act requires that the payee or the
holder in due course of the cheque to issue a notice in writing to the drawer
making a demand for payment of the cheque amount. Such notice must be
given within 30 days of information from the bank regarding the return of
cheque as unpaid.

The requirement of giving of notice is mandatory. There is no mode

prescribed under section 138 for serving the notice. It is sufficient that the
notice in writing is served on accused. Where no notice making demand for
payment was served upon the drawer as contemplated under clause (b) and
clause (c) of Section 138, which would mean that no demand has been made
within the specified time from the date of dishonour of cheque in question,
conviction will not be sustainable11.

Consequence of part payment by drawer after issue of notice

Section 138 clearly shows that in the event of the drawer of the cheque
failing to make the payment of the said amount of money, a prosecution can

11 Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)

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be maintained. The expression "said amount of money" can only denote the
amount for which the cheque is drawn and cannot relate to a part of it. Even
where part payment is made by the drawer after issue of statutory notice, the
prosecution can not be quashed12.

Liability of drawer after deposit of entire amount during trial

As stated by the Supreme Court once the offence is committed, any payment
made subsequent thereto will not absolve the accused of the liability of
criminal offence, though in the matter of awarding of sentence, it may have
some effect on the court trying the offence. But by no stretch of imagination,
a criminal proceeding could be quashed on account of deposit of money in
the court or that an order of quashing of criminal proceeding, which is
otherwise unsustainable in law, could be sustained because of the deposit of
money in this court. The deposit of money by the drawer, therefore, during
the trial is of no consequence13.

Death of Drawer

The criminal liability can not be fastened to the heirs and the legal
representatives of the person who is said to have been guilty of the offence
in question. The cheque presented for realization by the complainant was
returned on the ground of insufficient funds. The notice sent was returned
with postal endorsement 'party expired'. Wife and daughters of the drawer of
the cheque cannot be prosecuted for the offence under Section 138 of the Act
for the alleged failure of the drawer in meeting the liability to pay the

12 Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).
13 Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)

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amount covered by the cheque which was dishonoured in response to the
notice sent by the complainant14.

Drawer declared insolvent

The drawer cannot escape from the criminal liability by putting forward he
plea that he is not bound to discharge the liability mentioned in the
complaint as he was already declared as an insolvent, especially when there
is section 139 permitting the court to presume that there is an existing
liability and the issuance of the cheque was made towards the discharge of
the said liability.

14 Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)

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 DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE

Rightful Dishonour - when bank may refuse to honour

When there is the relationship of banker and customer between the parties,
the banker is under an obligation to pay cheques when a mandate to pay is
received from the customer, or when a cheque is issued.

However, there may be a number of circumstances when the bank has no

other alternative but to return the cheque and in all such cases the bank is
fully justified in returning the cheque. These are the cases which may be
termed as a countermand from the customer which means an order to revoke
the former instructions and annulling the former mandate given by the
customer to the bank to honour the cheques and it also means the situations
resulting from the closure of account by the customer, prohibitory
'garnishees' orders having been received from the court or orders for
payment having been received from the court or orders for payment having
been received under Section 226 (3) of the Income-Tax Act, 1961 and
similarly it also means the situation when there is a restrained order from the
court, notice of death of the customer, lunacy of the customer, notice of loss
of cheque or forged signatures on the cheque.

Wrongful dishonour of cheque – Drawee/ bank’s liability to pay

damages

In case all the conditions which are necessary for the payment of a cheque
are present and have been fulfilled then if the bank dishonours a cheque it
will amount to a breach of contract for which the banker is liable to pay
damages.

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The liability of drawee of cheque in case of a wrongful dishonour has been
dealt with under Section 31 of the Negotiable Instruments Act, 1881. Section
31 states as follows:

"the drawee of a cheque having sufficient funds of the drawer in his hands
properly applicable to the payment of such cheque must pay the cheque
when duly required so to do, and, in default of such payment, must
compensate the drawer for any loss or damage caused by such default".

The position of law has also been made clear in a number of authorities.
Reference may be made to the following:

In New Central Hall v United Commercial Bank Ltd. the Madras High Court
held that where a banker having sufficient funds of a customer in his hands
fails, even by mistake to honour cheque issued by the customer, the
customer has a right to claim damages.

In Jogendra Nath Chakrawarti v. New Bengal Bank Limited 15, it was held,
"where the banker, being bound to honour his customer’s cheque, has failed
to do so, he will be liable in damages. If, special damage, naturally ensuing
from the dishonour, is proved, it will be properly taken into account in
assessing the amount of the damages. If the customer be a trader, the court
may properly award substantial damages, in the absence of proof of special
damages. In other cases the customer will be entitled to such damages as
will reasonably compensate him for the injury which, from the nature of the
case, he has sustained. All loss flowing naturally from the dishonour of a
cheque may be taken into account in estimating the damages.

Compensation for wrongful dishonour

15 AIR 1939 Cal. 63

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Wrongful dishonour of a cheque exposes the drawee bank to statutory
liability to the drawer to compensate him for 'any loss or damage cause by
such default'.

The principle of awarding compensation to the drawer of a cheque is

reparation for the injury sustained or likely to be sustained by reason of
dishonour. In almost every case the drawer can recover substantial damages
against the drawee on the basis of injury to his credit, although he may not
be able to prove that he had suffered actual pecuniary loss through the
dishonouring of the cheque16. However, there appears to be a distinction
between a trader and a non-trader in this respect, while a trader is always
entitled to substantial damages for dishonouring of his cheque, a non-trader
will be entitled only to nominal damages in the absence of an allegation and
proof of substantial damages17.

The General rule followed by the courts in awarding damages is that

damages are awarded for foreseeable and actual loss suffered and the
quantum of damages is usually based on the principle of ‘restitutio in
intgegram’ i.e. restoring the person to the position he would have been in if
he had not suffered a damage. But in case of trademan’s cheque the damages
awarded are inversely proportional to the amount on the cheque. Thus,
smaller the amount of the dishonoured cheque, greater are the damages paid.
The reason behind this rule is, businessman’s loss of reputation or status or
goodwill is once again inversely proportional to the amount of the cheque.

Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595
16

Gibbons v. Westminster Bank (1939) 3 All E.r. 577

17

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 DISHONOUR OF CHEQUE - LIABILITY OF A COMPANY

Since a company is an artificial person it is incapable of committing any

crime personally. However, if certain crimes are committed by its officials in
the name of the company then in such circumstances a company is said to
have committed these crimes. So far as the punishment is concerned, its
liability can be only in terms of fine. The company shall be responsible for
the acts of commissions and omissions of the persons working for the
company.

Section 141 (1) of the Negotiable Instruments Act, 1881 reads as follows:

"If the person committing an offence under section 138 is a company, every
person who, at the time the offence was committed, was in charge of, and
was responsible to the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and proceeded against and
punished accordingly;

Provided that nothing contained in this sub-section shall render any person
liable to punishment if he proves that the offence was committed without his
knowledge, or that he had exercised all due diligence to prevent the
commission of such offence".

Thus, Sub-section (1) of Section 141 (1) provides that if a person

committing an offence under the section is a company, every person who, at
the time when the offence was committed, was in charge of, and responsible
to, the company for conduct of its business, as well as the company shall be
deemed to be guilty of the offence and shall be liable to be proceeded against
and punished accordingly. The offender in Section 138 is the drawer of the
cheque.

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However, if the person provides that the offence was committed without his
knowledge, or that he had exercised all due diligence to prevent the
commission of such offence, he shall not be liable to punishment under this
Section.

Sub-section (2) further provides that where any offence under this Act has
been committed by a company and it is proved that the offence has been
committed with the consent or connivance of, or is attributable to, any
neglect on the part of, any director, Manager, secretary, or other office of the
company, such director, manager, secretary or other officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.

In case of a company the day to day functions are not carried out by all the
directors but the board delegates the powers to one or two directors or
officers of the company like the Manager, Secretary, etc. Besides the
Manager there are a number of other officers or persons who are liable for
the affairs of the company. Similarly, all the partners in the partnership firm,
Karta of the HUF, a Secretary of the Trust, Club, Co-operative Society for
the purpose of the present section are to be considered as in charge of the
company and in case any cheque is drawn by these persons then the
company is liable irrespective of the fact that such a person may not be
holding due powers of issuing a cheque. Where the cheques were issued by
the authorized signatory will not preclude prosecution of directors18.

The Vicarious liability of a person for being prosecuted for commission of

an offence by the company arises if at the time when the offence is alleged to
have been committed, he was in charge of and was responsible to the
company for the conduct of its business. It is necessary that there have to be

18 Ashok Muthanna v. Wipro Finance Ltd. (2001) 105 Comp Cas 203 (Mad).

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averments in the complaints that the petitioners were in charge of and were
also responsible to the company for the conduct of its business of the
company19.

Thus, we can conclude that three categories of persons can be discerned

from the said provision who are brought within the purview of the penal
liability through the legal fiction envisaged in the section. They are: (1) The
company, the principal offender, which committed the offence; (2) Every
one who was in charge of and was responsible for the business of the
company; (3) Any other person who is a director or a manager or a secretary
or officer of the company, with whose connivance or due to whose neglect
the company has committed the offence20.

However, in case an employee of the company proves that the offence was
committed without his knowledge or that he had exercised all due diligence,
then he may not be prosecuted under the Act. In case he proves that after due
diligence he could not prevent the commission of the offence, it may provide
a valid defence. Only the person can be set free but not the company because
the scope is limited to Section 141(1) only. This is because under Section
138 the company is a drawer21.

Winding up proceedings pending

A company cannot escape from a penal liability under section 138 of the Act
on the premise that a petition for winding up of the company has been
presented and was pending during the relevant time. The Company cannot
avert its liability on the mere ground that the winding petition was presented
19
Gyan Chand Kotia v. Indian Renewable Energy Development Agency Ltd.
(2000) 99 Comp Cas 517 (Del).
Anil Hada v. Indian Acrylic Ltd. (2000) 99 Comp Cas 36 (SC)
20

21Sivakami (M) v Bharat Ginning & Oil Mill Factory 2000 Cri LJ 1043
(Guj)

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prior to the company being called upon by a notice to pay the amount of the
cheque.

There is no provision in the Companies Act, 1956 which prohibits

enforcement of the debt due from the company. When a company goes into
liquidation, enforcement of debt due from the company is only made subject
to the conditions prescribed therein. But that does not mean that the debt has
become unenforceable altogether22.

22 Pankaj Mehra v State 2000 Cri LJ 1781 (SC)

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 CONCLUSION

The law relating to Negotiable instruments is the law of the commercial

world which was enacted to facilitate the activities in trade and commerce,
making provision of giving sanctity to the instrument of credit which would
be deemed convertible into money and easily passable from one person to
another. In the absence of such instruments, the trade and commerce
activities were likely to be adversely affected as it was not practical for the
trading community to carry on with it the bulk of currency in force.

The main object of the Act is to legalise the system by which instruments
contemplated by it could pass from hand to hand by negotiation like any
other goods.

Chapter XVII was inserted in the Act 1988 with a view to promote the
efficacy of banking operations and to ensure credibility in transacting
business through cheques. However the chapter is not comprehensive and
lacks to cover the various aspects of the commercial transactions especially
in view of the emerging ways of payment through the Internet and other
electronic means. Section 138 also does not specifically cover the aspects
such as where the payment has been stopped by the drawer or where the
account has been closed prior to the endorsement of the cheque. These
provisions no doubt have served their purpose but they could be more
elaborate in solving the dispute rather than merely relying on the Court
judgments.

Though insertion of the penal provisions have helped to curtail the issue of
cheque lightheartedly or in a playful manner or with a dishonest intention
and the trading community now feels more secured in receiving the payment
through cheques. However there being no provision for recovery of the
amount covered under the dishonoured cheque, in a case where accused is
convicted under section 138 and the accused has served the sentence but,
unable to deposit amount of fine, the only option left with the complainant is
to file civil suit. The provisions of the Act do not permit any other alternative
method of realization of the amount due to the complainant on the cheque
being dishonored for the reasons of "insufficient fund" in the drawer’s
account.

However, the processes to seek civil justice is notoriously dilatory and

recover by way of a civil suit may take inordinately long time therefore if

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the Government of India could establish a tribunal to deal with the dishonour
of cheques and the liability arising therefrom, it could make the process of
recovery of damages faster for the aggrieved party. For example, the Debts
Recovery Tribunals have been established by the Government of India under
an Act of Parliament (Act 51 of 1993) for expeditious adjudication and
recovery of debts due to banks and financial institutions. Establishment of a
similar tribunal to deal with the cases of dishonour of cheques could perhaps
provide a faster relief to the aggrieved party.

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 BIBLIOGRAPHY

Books:-

1. R.K Suri; Dishonour of Cheques- Prosecution & Penalties, ALT

Publishers, Hyderabad;

2. S.N. Gupta, Dishonour of cheques-Liability Civil & Criminal,

Universal Book Traders, Delhi;

3. Rajesh Gupta, Dishonour of cheques – Law and Practice, Bharat

Law House Pvt Ltd, New Delhi;

4. A.N Saha, Law of Dishonour of cheques, Orient Publishing

Company, New Delhi;

5. S.K. Awasthi, Law of Dishonour of cheques – Forgery and

Cheating, CTJ Publications, Pune;

6. R. Swaroop, Cases on Dishonour of cheques (Under Section 138 to

Section 142 of the Negotiable Instruments Act), Law Aid

Publications, Madras;

7. Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law

House, New Delhi;

8. M.S. Parthasarthy, Cheques in Law and Practice, Universal Law

Publishing Co. Pvt. Ltd., Delhi;

9. S. Chand, Business laws, S. Chand and Company Ltd., New Delhi;

Article by T.N Pandey, Dishonour of cheques: whether all directors of a

company can be prosecuted in case of dishonour of cheques. .

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Websites:

1.

2. Manupatra

3. LexisNexis

4. www.legalserviceindia.com

5. https://blog.ipleaders.in

6. www.vakilno1.com

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